Thursday's Thoughts

The US dollar is slightly firmer as Thursday's European session gets under way. The dollar peaked on Monday and has drifted lower this week. Asia consolidated and Europe appears poised to take the dollar lower. If the euro does rise above the $1.3780-$1.3800 area, the next corrective objective is near $1.39. Sterling appears to have bottomed yesterday near $1.57 and despite expectations of a soft retail sales report, it is outpeforming the euro. Support on the cross comes in near GBP0.8680. The dollar has been confined to a 18 tick range against the yen centered on JPY76.71. European events continues to dominate trading considerations. Merkel and Sarkozy's statement endorsing Greece within the euro zone seemed to be a big yawn, but perhaps there was more to it. It seems that there must have been stronger debate behind closed doors about asking Greece to leave the monetary union. Indeed a Slovakian minister conitnues to call for this today. However, the Berlin-Paris axis says no. This would seem to be new support of the continued move away from the edge of the abyss, Yet the 5-year Greek CDS is at a new high (5047 bp). This implies the cost to insure is greater than the 50% write downs several European banks haved taken on their Greek exposure. On the other hand, short-term Greek interest rates are lows (2-5 years), higher going out (with the 8-year a bit quirky, but the 10-year (generic) is up 58 bp. The short-end might be influenced by ECB buying, so as a while it does not look like market fully accepts what Merkel and Sarkozy have indicated. Perhaps most puzzling is the EC President Barroso indicating a new proposal for a euro bond will be forthcoming shortly. This seems strange because the German court ruling seemed clearly to suggest that a ewuro bond would violate the German constitution. Policy makers and investors still do not appear to have taekn on board the court ruling that seemed to clearly oppose permanent transfers, and that would appear to include the ESM, which is to replace the EFSF, which was always regarded as temporary. This is not to suggest that there is not legal wiggle room, but a euro bond seems to be a difficult propostion, regardless of the merits.